I have been recently involved in a number of workshops with clients, contractors and consultants on large infrastructure projects that are hard money contracts. That is, contracts with very clear scopes, and fixed price arrangements that are generally lump sum with little wriggle room through the client procurement process for commercial negotiation or flexibility. There are projects and works where this procurement model is appropriate. Fixed scopes, clear parameters and very few variables which allows the supply chain to price confidently the project.
The problem with this is that very few circumstances where this is the case. Generally, there are parts of the scope that are not clear, vague or change. Examples of this include design which is generally not finished or up to constructability standard to build now. Other areas include stakeholder engagement, services, ground conditions or other packages or work or other variables which lead to scope change. Scope change leads to commercial tension between the client and the successful tenderer. Commercial tension can then translate in to behaviours that are not collaborative or constructive which can damage relationships and project outcomes. This is particularly the case where the government agency accepts a “low ball” tender which is a price that is significantly under the budget estimate. They accept it thinking that they have procured a “bargain” but what they have essentially done is saddled up a bucking bronco. A successful tenderer that is likely to have not taken in to account risks, costs and scope that they will eventually need to deliver. By delivering it, they will also expect to get paid for it regardless of whether they included it in the tender. This will translate into variations and scope change requests that will be in addition to the tendered price.
The government organisation undertakes this procurement approach with the right intent. They want confidence and certainty around the price submitted as they have a finite budget for the work and they don’t want to exceed it. They undertake the procurement and get assurances from the successful tenderer that they can confidently deliver the project for the price tendered. Everyone is happy, the contract is awarded and the project starts.
The project is mobilised and it is underway. The project team starts with the right intent and looks to deliver the project. The client has a contract which they want the successful tenderer to comply with. It has dawned on the tenderer that they need to deliver on the scope and contract regardless of what they included in their tender. There are parts which have not been included and they are getting commercial pressure from their home organisations to “cut the cloth” to suit the size of the table. That is, make sure you deliver the project but don’t lose money and ensure cash flow, revenue and cost positions are maintained including an acceptable project margin at the end of the project.
The client requests some changes. They appear insignificant but they add up. The tenderer puts in variations for these changes. Design is late and this impacts programme. Again, variations are lodged. Stakeholder engagement and services are challenging which lead to time extension variations and commercial pressure. We then see the game starting where the tenderer looks to “recover” what they left on the tender table at procurement and the client looks to ensure the tenderer delivers what was expected in the contract. This sets up behaviours and practices that are not collaborative and potentially damage relationships between organisations and individuals. It becomes a vicious cycle that is hard to recover from for all parties. A perennial challenge on hard dollar money contracts. It is entirely reasonable for someone to ask “can we truly be collaborative in a hard money dollar contract?” A great question particularly if you have had the scars of trying to deliver a project in the scenario described above.
I genuinely believe you can be collaborative regardless of the procurement model. Certain procurement models do lend themselves to more collaborative behaviours from all involved but with the right strategies put in place, you can still have great collaboration on hard money procurement models. These can include the following:
- Clients putting in place guidelines and policies around low ball tender offerings. They are either rejected up front where they are under a certain “threshold” or the tenderer is asked to resubmit a price that includes omissions and exclusions so that you can compare apples with apples. This means rejecting the probity card in some instances because you know the problems that will present down the track if you do not deal with the obvious omissions early and up front before award;
- Careful selection of the procurement model that suits the circumstances, scope and outcomes that are to be delivered by a project. It is not about selecting something because it sounds like the right approach. It needs to be through a multi-criteria analysis approach to selecting the right procurement model that takes in to account the unique variables of the project;
- Clear risk allocation early and up front during procurement but also through project award and mobilisation. Risk allocation is critical in understanding what the client is responsible for and what the successful tenderer needs to own in terms of risk. This sets the tone for successful project delivery and roles and responsibilities;
- Agreement to an independent engineer or representative that can quickly and objectively resolve variation claims. They have an important role to play and can be independent and objective when changes occur. The goal is to ensure everyone is treated fairly and equitably when changes occur that organisations are entitled to fair payment for;
- A commitment to best for project behaviours from all involved in the project. Behaviours that drive the right behaviours and approach to successful project delivery. This needs to be workshopped with key leaders across the project and committed to from everyone. This needs to be measured regularly to ensure we are delivering against these commitments;
- A clear variation and scope change process including clear expectations around documentation, evidence and information required. Everyone knows the process and the expectations around documentation that will lead to timely and objective decision making on the variations from the independent engineer or representative;
- Committed leadership from the senior leaders on the project to collaboration. Without this, all the rest of the strategies will not be effective. Leaders set the tone for others involved in the project. They need to role model the right behaviours which others will follow; and
- Clear role clarity around individuals responsible for delivering the project. This includes the project team, client representatives including project managers, independent engineers and other key roles. This role clarity allows everyone to play to their strengths, fulfil their roles and leads to respect for the relationships and outcomes each person is responsible for delivering.
Hard money contracts do not mean everyone needs to retreat to their corners. The mindset must be that we put in place strategies that will allow for us all to enjoy the journey of delivering the project under the collective aim of delivering outstanding outcomes. It requires strong leadership, a commitment to setting the project up right commercially from the start and a focus on behaviours that drive collaboration which benefits all parties involved.